If you are paying 5-6 figures in taxes this year this is the perfect blog post for you.
First, let’s start off by saying you are very lucky to be in this position. You are making money.
I was doing my taxes this past weekend (yes I do my own- that’s for another story) and in buying my solar panels I saved $9300 in taxes. It did cost me for the panels, but I realized that it kept $9300 on my balance sheet, not Uncle Sam’s.
You can do the same. $3000 in tax savings every year for 20 years invested at a 7% return grows to $237,470. Think you are to old for this? If you are 65 do you think you might live to 85? Well then, you aren’t.
1. Tax Planning should be the #1 priority for you
When you are paying big dollars per year in taxes, the biggest alpha comes from Tax Planning.
You need to nail down and utilize any and all that apply to you:
- Retirement accounts
- Entity selection
- QBI deduction
- Income deferral, deduction acceleration
- Tax loss harvesting
- Tax location
- Charitable giving (in the most efficient way)
- Deferred comp plans
- Real estate
To name a few.
When your tax bill is high, there is normally a ton of room for great Tax Planning that can significantly reduce your tax burden over your lifetime. The key word here is lifetime.
2. Hire a great team
The team around you makes a huge difference in how much tax you are going to pay in your lifetime.
Cheap professionals end up costing you a lot more in the long run. Not coordinating your advice will do the same. Does your accountant know what your investment adviser is doing? Who is coordinating your planning?
You want to invest in a great financial planner, CPA, and Estate Planning attorney to be sure your team is taking advantage of all the best Tax Planning moves out there.
Invest in this team and keep them around for a long time once you find the right one.
This leads to smooth sailing once you find the right pieces. They will be worth way multiples of the cost you pay them.
They will also be the ones to stay on top of law changes to ensure you are always doing the best planning possible.
3. Don’t ignore the system
So often high income/high net worth individuals consider themselves too busy to pay attention to the system.
Whether this is:
– not being aware of personal deductions
– not planning early enough in the year to take advantage of opportunities
-if a business owner paying too low of a reasonable salary
– if an employee, not fully utilizing your employee benefits- not coordinating them with your personal planning.
– etc.
Let me tell you, it is not worth it to take the time….and not in October but in April. RIGHT AFTER YOU FILE THIS YEARS TAX RETURN.
You make too much money to ignore the system and then have to worry every year that your tax bill is too high. If you don’t have the time, pay someone!
4. Timing paying vs deferring taxes
One of the best Tax Planning tools you have is around timing income. Let’s say you are in your highest income earning years right now. Deferring income through 401(k)s, solo 401(k)s, deferred comp plans, etc. can be a game changer.
You may be able to reduce income at the top brackets and then convert those funds to Roth in lower brackets in early retirement, when you take a reduced role, after you sell your business, etc…
This can drastically reduce your lifetime tax bill. But you need a great plan around this.
5. You are going to pay tax
A realization many can simply not accept is that when you making money, you are going to pay taxes. It is that simple.
There is no way to get around the system and pay no tax. No matter what you read on social media.
And that is okay. You are a great earner.
Utilize your Tax Planning options out there and then focus on making even more money. Your time is best spent there.
6. Real estate can be great but it is hard to take those losses against your income
Real estate is an has been a great asset class with:
- Bonus depreciation
- Tax deferred growth
- Depreciation
- 1031 exchanges
- Step up in cost basis on death
It can be a great asset class even if you cannot use those losses against your active income. (Remember to take losses against your active income you must show material participation).
Maybe you cannot run a business, a department, be a doctor, etc. and get REPS status. You also can not utilize the short term rental loophole (2 weeks) and not be the ones doing the work.
You can’t hire property manager then take these losses. It does not work this way.
But still real estate can be a good investment, good income producing real estate with profitable, depreciation sheltered yields.
At the end of the day, understand if you are paying taxes you are making money. Be grateful. BUT PAY ATTENTION!
Do the best Tax Planning every year and move on.